Russell Vaz

Director's Duties: Re-Examining the Bona Fide Test

A PDF version of the article can be found here.

Director’s duties: Re-examining the bona fide test

 

Desmond Chye & Russell Vaz*

 

I.                    Introduction

 

It is well-established that directors are fiduciaries of the company they serve. As fiduciaries, they owe a host of duties, including the duty to act bona fide in the company’s best interests. Unfortunately, recent developments have created uncertainty over how the test is to be applied. In particular, whether the test has a substantive objective component in addition to a subjective one. The dominant interpretation is that both components are part of the test. However, closer inspection exposes some flaws in this interpretation. This article will explore the arguments for the contrary position: that the test for the duty to act bona fide in the company’s interests is purely subjective.

 

II.                 The Original Test

 

Originally, the Singapore courts’ test for assessing bona fides was purely subjective. Directors need only act in “what they consider – not what a court may consider – is in the interests of the company” to satisfy the duty.[1] Courts were motivated by “strong policy considerations” to avoid “coerc[ing directors] into exercising defensive commercial judgment” that “will dampen, if not stifle, the appetite for commercial risk and entrepreneurship”.[2] As such, the duty would not be breached if the directors acted in the “honest and reasonable belief that they were for the best interest of the company, even if those decisions turned out subsequently to be money-losing ones”.[3]

 

It is apposite to note that the test may occasionally dip into the realm of objectivity. This is also known as the evidential standard version of the objective test. In the Singapore High Court case of Cheam Tat Pang v PP[4] the Learned Judge made the following remark:[5]

 

“It is settled law that if directors take risks which no director could honestly believe to be taken in the interests of the company, such actions could well support allegations that the directors in question had acted in breach of their fiduciary duties to the company”.

 

The Learned Judge’s remarks appear limited to establishing the evidential proof of the subjective mind of the director in question to see if he did in fact act reasonably. As such, the evidential objectivity did not detract from the overall subjectivity of the test.

 

III.              The Dominant Interpretation of the Current Test

 

The locus classicus for the new test is Ho Kang Peng v Scintronix.[6] The facts of the case are simple: the defendant director effectively paid bribes to advance the company’s overseas interests.[7] In applying the bona fide test, the courts stated:[8]

 

“However, this does not mean that the court should refrain from exercising any supervision over directors as long as they claim to be genuinely acting to promote the company’s interests. First, “where the transaction is not objectively in the company’s interests, a judge may very well draw an inference that the directors were not acting honestly”... The test in Charterbridge Corporation Ltd v Lloyds Bank Ltd [1970] Ch 62 (at 74) of “whether an intelligent and honest man in the position of a director of the company concerned, could, in the whole of the existing circumstances, have reasonably believed that the transactions were for the benefit of the company”, has been accepted and applied by this court in Intraco (CA) (at [28]). On the other hand, it will be difficult to find that a director has acted bona fide in the interests of the company if he “take[s] risks which no director could honestly believe to be taken in the interests of the company”… Secondly, it seems that the requirement of bona fide or honesty will not be satisfied if the director acted dishonestly even if for the purported aim of maximising profits for the company.” (emphasis added)

 

By advocating for the standard of an “intelligent and honest man”, and stating that acting for the company’s best interests would be insufficient, the courts seemed to be introducing a substantive objective component.

 

This interpretation of Scintronix has been largely accepted as the orthodoxy. Subsequent cases, such as the Singapore Court of Appeal case of Goh Chan Peng v Beyonics Technology Ltd[9] appear to support this view, stating that the bona fide test has “both subjective and objective elements”.[10] Eminent local academics such as Professors Dan Puchniak and Tan Cheng Han SC have also adopted the position that the test has a substantive objective component.[11]

 

IV.              The Alternative Interpretation of the Current Test

 

A.      Case Authority supporting a Purely Subjective Standard

 

A closer inspection of Scintronix reveals that it may not have laid down a discrete objective component at all. Phrases like “intelligent and honest man” which hinted at an objective standard were tempered with statements that they would only be used to “draw an inference” or when directors only “purport” to act in the company’s best interest.[12] This suggests that the courts were only advocating the use of an objective evidentiary tool to determine the director’s subjective state of mind, keeping in line with the traditional test. Furthermore, the court never explicitly stated that there would be an objective component. This is an odd oversight considering the uninterrupted pedigree of the purely subjective test.

 

The apparent support of Beyonics is also to be doubted. The court commented that “where the transaction is not objectively in the company’s interests, a judge may very well draw an inference that the directors were not acting honestly” (emphasis added).[13] This statement suggests that the courts were using an objective evidentiary tool as explicated by Professor Walter Woon. This possibility was noted by the Singapore High Court in Ong Bee Chew v Ong Shu Lin,[14] acknowledging that Beyonics could have merely used an objective evidentiary tool. We note that while Ong Bee Chew did ultimately support the two-part test, this was for procedural fairness rather than doctrinal accuracy as Beyonics was not available to the parties at the time of their submission.[15]

 

Furthermore, as suggested by Professor Hans Tjio, Scintronix may have simply applied the original Charterbridge test instead.[16] The court in Charterbridge Corporation Ltd v Lloyds Bank Ltd[17] held that the objective standard of an “an intelligent and honest man” would only be applied where the director exercised no discretion at all.[18] The rationale behind it is simple – failing to engage in any subjective consideration whatsoever, an objective assessment remained the only way to determine if he had acted in the company’s interests.[19] In Scintronix, the court found that “[t]he wrong committed by the Appellant in the present case cannot be regarded as an error of judgment – it arose because he failed to exercise any judgment at all.” (emphasis added).[20] As determined by Professor Tjio, this indicates Scintronix was merely a use of the original Charterbridge test in Singapore, applying the objective standard only when no discretion was exercised.[21] This would leave the traditional subjective test largely intact.

 

B.      Policy Arguments supporting a Purely Subjective Standard

 

The main public policy rationale for a substantive objective component is to prevent directors from carrying out immoral acts they believe were in the company’s best interests. Under a purely subjective test, he would be exonerated, lowering the standards of commercial morality.  However, the need to maintain a minimum standard of commercial morality must be balanced against the need to avoid stifling entrepreneurship with excessive judicial interference. 

 

Unfortunately, the two-part test risks stifling entrepreneurship. Its vagueness instils undue fear in directors who would be unsure of what standard to act on. Courts have elucidated that the objective component depends on whether, “objectively, the transactions were not in the company’s interests”.[22] However, in an attempt to mitigate judicial interference, they have softened the standard, stating that is only serves to “[hold] directors to minimum standards of commercial morality” and that the court will thus apply “a very low baseline in order to avoid unnecessary interference”.[23] Unfortunately, ‘commercial morality’ is a nebulously defined criterion that does little to resolve the uncertainty.

 

Furthermore, the test is phrased very widely as it takes the perspective of an ‘honest and intelligent director’ such that even negligence can potentially fall under the objective limb. This problem was evident in Scintronix where the court made the following remark:[24]

 

“He simply continued a highly irregular and improper practice which he understood to have been initiated by the previous management under a different form without so much as inquiring why it was made, whether it would implicate the Company, and whether proper sanction had been obtained. He had failed to exercise reasonable care.” (emphasis added)

 

While the subsequent cases of Beyonics and Ong Bee Chew all stressed a ‘minimum standard’, they never repudiated Scintronix’s requirement for ‘reasonable care’ such that it is possible for the broad standard to persist since that would comport with what is expected of an ‘honest and intelligent’ director. 

 

If the objective standard is truly, as a plain reading of the judgement indicates, that of an ‘honest and intelligent director’, the substantive objective test would impose too harsh a burden on directors. This is as 99% of all domestic companies are Small Medium Enterprises.[25] It is unrealistic to expect small businesses to have the funds to hire professionals to function as directors. Nor is it realistic to expect all business owners, many of whom are uneducated, to perform the role of an “honest and intelligent director”. Imposing such an exacting standard would “dampen, if not stifle, the appetite for commercial risk and entrepreneurship”.[26]

 

C.     Applying the Purely Subjective Test to existing Case Law 

 

The existing case law has dealt solely with the issue of bribery. Bribery satisfies the targeted fact matrix of being both immoral and prima facie in the company’s interest. However, such situations could have been easily prevented by a purely subjective test. As noted in Scintronix, bribery does not help the company’s long-term interests, only its short-term interests.[27] Ergo, a director could subjectively believe giving a bribe to be in the company’s short-term interest but still fail to subjectively believe it is in the company’s interests as a whole, after taking its long-term interests into account. The situation of receiving a bribe, as in Beyonics, is much more straightforward – the director accepted a bribe to do something he otherwise would not have done. It is unlikely any director could subjectively believe that accepting a bribe would further the company’s interests.

 

V.                 Conclusion

 

The bona fide test plays a critical role in regulating director’s duties. Uncertainty over its components could prompt unwarranted defensive decision making, curtailing the economic potential of Singapore’s businesses. A clearer test is therefore needed. While we hope that the courts will take the flaws of the two-part test into account, we recognise that the current orthodox interpretation of the bona fide test will likely remain the law for the foreseeable future. Our article merely aims to explore the possibility of an alternative rather than to overturn the status quo.

 

 


* LLB (Candidate) (NUS), Class of 2023. All errors and views expressed in this article remain our own.

[1] Cheong Kim Hock v Lin Securities [1992] 2 SLR 349 [Cheong Kim Hock] at para 26.

[2] Vita Health Laboratories Pte Ltd v Pang Seng Meng [2004] 4 SLR 162 [Vita] at para 17.

[3] ECRC Land Pte Ltd v Ho Wing On Christopher [2004] 1 SLR(R) 105 at para 49.

[4] [1996] 1 SLR 541.

[5] Ibid at para 80.

[6] [2014] 3 SLR 0329 [Scintronix].

[7] Ibid at paras 32-34.

[8] Ibid at paras 38-39.

[9] [2017] 2 SLR 592 [Beyonics].

[10] Ibid at para 35.

[11] D Puchniak, CH Tan & SS Tang, “Company Law” (2017) 18 SAL Ann Rev 247 at paras 9.7-9.8.

[12] Scintronix, supra note 6 at paras 32-34.

[13] Beyonics, supra note 9 at para 36.

[14] [2017] SGHC 285 [Ong Bee Chew] at para 78.

[15] Ibid at para 78.

[16] Hans Tjio, P Koh & PW Lee, Corporate Law (Academy Publishing, 2015) [Tjio, Koh & Lee (2015)] at para 09.043.

[17] [1970] Ch 62 [Charterbridge].

[18] Ibid at 74.

[19] Tjio, Koh & Lee (2015) supra note 16 at para 09.043.

[20] Scintronix, supra note 6 at para 40.

[21] Tjio, Koh & Lee (2015) supra note 16 at para 09.043.

[22] Beyonics, supra note 9 at para 35.

[23] Ong Bee Chew, supra note 14 at para 84.

[24] Scintronix, supra note 6 at para 40.

[25] Singapore Department of Statistics, “Topline Estimates For All Enterprises And SMEs, Annual” (accessed 2 January 2021)

<https://www.tablebuilder.singstat.gov.sg/publicfacing/createDataTable.action?refId=15808>

[26] Vita, supra note 2 at para 17.

[27] Scintronix, supra note 6 at para 37.

Counting Double Counting

The PDF version of this article can be found here.

counting double counting

 

Desmond Chye & Russell Vaz*

 

I.               INTRODUCTION

 

The law against double counting is seldom taught but remains an important part of the criminal law. It ensures an offender is not punished twice for the same crime. This is especially vital in this day and age where the preponderance of similar offences makes double counting far more likely. In this article, we will attempt to explain the law on double counting; in particular, the dispute over the test for ‘same offences’ and the effect that Tan Khee Koon v Public Prosecutor[1] has had on this dispute.

 

II.            WHAT IS DOUBLE COUNTING?

 

Double counting is not to be confused with its more famous relative, double jeopardy. As helpfully explained by the Singapore High Court in Chong Kum Heng v Public Prosecutor, “[t]he rule against double jeopardy is that a person cannot be made to face more than one trial for the same offence”.[2] In contrast, the rule against double counting prevents double punishment for the same offence, where the same set of facts gives rise to liability under more than one written law.

The statutory basis for the prohibition on double counting derives from section 40 of the Interpretation Act:[3]

“Where any act or omission constitutes an offence under 2 or more written laws, the offender shall, unless the contrary intention appears, be liable to be prosecuted and punished under any one of those written laws but shall not be liable to be punished twice for the same offence.” [emphasis added]

A plain reading makes it clear that the determining factor in finding double counting is whether the offences charged constitute the ‘same offence’. However, as this was not defined in the IA, case law is instructive on what it means.

 

III.           THE MEANING OF ‘the saME OFFENCE’ IN CASE LAW

 

The starting point would be the Singapore High Court case of Tan Khee Koon,[4] where the court applied the test in the Malaysian case of Jamali Bin Adnan v PP.[5] However, the endorsement of Jamali, which is a double jeopardy case, indicates that the definition of the ‘same offence’ is shared with double counting, thus introducing some complications.

In the area of double jeopardy, the locus classicus on what constitutes the ‘same offence’ is the English House of Lords case of Connelly v Director of Public Prosecutions.[6] In Connelly, there were two proposed approaches to finding similarity. Lord Morris adopted a more generous approach where the similarity need only be substantial.[7] On the other hand, Lord Devlin took a stricter view that the offence must be exactly the same in law because “legal characteristics are precise things and are either the same or not”.[8] However, it is unclear from the remaining Law Lords’ judgements which approach is to be preferred.

The most authoritative court to have weighed in on the conflicting approaches is the Privy Council (on appeal from Singapore). In Wee Harry Lee v Law Society of Singapore,[9] a solicitor was subject to two disciplinary proceedings for violations under section 84(2) of the Legal Profession Act.[10] The provisions violated were:

“[The solicitor] (a) has been convicted of a criminal offence, implying a defect of character which makes him unfit for his profession; or (b) has been guilty of … grossly improper conduct in the discharge of his professional duty …”[11]

The first proceeding arose from (b), which resulted in a two-year suspension, while the second proceeding founded on (a) resulted in a further two year suspension.

Their Lordships ultimately allowed the solicitor’s appeal against the further suspension, holding that the second proceeding was “an abuse of the disciplinary process”.[12] In coming to their conclusion, the court endorsed both approaches proposed in Connelly, but stopped short of deciding which approach was to be preferred as the result would be the same regardless. Even if the case fell outside the narrow scope of Lord Devlin’s test, it would still be covered “by the alternative form of relief which [Lord Devlin] favoured as mitigating the rigour of his strict test”.[13] This is likely the rule in Reg v Elrington,[14] where Cockburn CJ held that “[w]here a person has been charged with an offence (whether he be acquitted or convicted), he cannot be again tried “on the same facts in a more aggravated form””.[15] This leaves only two possible conclusions: the offences were the same using either Lord Morris’ or Lord Devlin’s test, or that the Elrington approach was used instead.

Assuming it was the former, it would appear impossible for their Lordships to have used Lord Devlin’s approach in Harry Lee if we were to examine the offences charged closely. This is because the emphasis in (a) is on the lawyer’s character (in other words, propensity for future professional misconduct) for which his criminal conviction is evidence thereof whereas (b)’s emphasis is on the lawyer’s actual act of wrongdoing. These are two conceptually distinct requirements that would certainly fail the exact similarity test. Therefore, in reaching the conclusion that they did, their Lordships must have considered the offences substantially—but not exactly—similar.

It is also interesting to note that the subsequent Singapore High Court case of Lim Keng Chia v Public Prosecutor[16] interpreted Harry Lee to stand for the former, as evidenced by the learned judge’s description of the case:[17]

“In Wee Harry Lee’s case, the Privy Council was asked to determine whether the two successive sets of disciplinary proceedings brought against the appellant were based on the same instance of misconduct; and if so, whether the second set of such proceedings amounted to a violation of the doctrine of autrefois convict and acquit or at the very least, an abuse of the disciplinary process provided for in the Legal Profession Act (Cap 217). The Privy Council answered these questions in the affirmative. It must be pointed out, however, that the Privy Council in Wee Harry Lee’s case was faced with two sets of the same sort of proceedings.”

The use of the phrase “same sort of proceedings” implied the learned judge’s belief that it was the similarity between the offences that was critical to the outcome. It would thus be reasonable to believe that in the future, the courts will not treat Harry Lee as a case applying the rule in Elrington.

We return to the decision in Tan Khee Koon, which began the controversy by citing Jamali. Ironically, this citation is the closest thing we have to a resolution. The test in Jamali involves an inquiry into whether essential ingredients of the offences are the same. In Jamali, the offences were held to be different because the essential ingredients of armed robbery differed from that of an offence under the Malaysian Internal Security Act 1960.[18] “[A]rmed robbery can be regarded as an aggravated form of theft causing fear of instant death or hurt on the intended victim voluntarily by means of a deadly weapon” while “the essential ingredients under the Internal Security Act 1960 are simply control of firearms and/or ammunitions without lawful authority”.[19] This bears a striking similarity to Lord Morris’ test, which the court in Jamali treated as the majority judgement without making any mention of Lord Devlin’s test. This signals an implicit endorsement of Lord Morris’ test over Lord Devlin’s by the court in Tan Khee Koon, albeit in obiter.

However, as the citation in Tan Khee Koon was merely obiter and no court has yet to make a definitive pronouncement, there regrettably remains some element of uncertainty as to whether Lord Morris’ substantial similarity approach is truly preferred.

 

IV.           TAN KHEE KOON’S SIGNIFICANT ADDITION TO DOUBLE COUNTING

 

Double counting arose as an issue in Tan Khee Koon. The case involved an accused who tried to steal $20,000 but was only able to obtain $4,500. He was charged with two separate offences: the first for obtaining $4,500 (“1st Offence”) and the second for attempting to obtain $20,000 (“2nd Offence”), with the former sum naturally being a component of the latter sum.[20] Although one concerned an attempt and the other concerned the actual commission of an act, statutory provisions prevent one from being punished with both.[21] The court therefore had to decide the following: can obtaining $4,500 be considered the same offence as attempting to obtain $20,000 if the $4,500 was a part of the $20,000?

The answer was simple: the 2nd Offence did not consist of an attempt of the 1st Offence alone. It consisted of a series of attempts; only one of which was committed. The learned judge approached the problem in an ingenious manner. His Honour broke down the 2nd Offence into 2 ‘sub-offences’, ie, (1) obtaining $4,500, and (2) attempting to obtain $14,740. In the result:

 

(a)   1st Offence: Obtaining $4,500

(b)  2nd Offence: Obtaining $20,000 = Obtaining $4,500 (‘Sub-offence 1’) + Attempting to obtain $15,500 (‘Sub-offence 2’)[22]

It becomes clear that Sub-offence 1 is identical to the 1st Offence.[23] In order to avoid double counting, it became necessary to separate the offending ‘sub-offence’ from the remaining portions.[24] However, the nature of the 2nd Offence prevented that, causing it to be struck out entirely.[25]

Tan Khee Koon represents a significant addition to our legal firmament. A single offence can now be considered an amalgamation of several smaller ‘sub-offences’. Double counting is now far easier to successfully plead, especially with infinitely divisible elements like money.

Unfortunately, this rule introduces uncertainties into the already fractious law on double counting. Chiefly, how far can an offence be broken down? Such ramifications can only be answered by the courts.

 

V.             CONCLUSION

 

Given the importance of double counting as a statutory safeguard against punitive punishment, the considerable uncertainty over what is required to find it is highly undesirable. The endorsement of Jamali’s essential ingredient test in Tan Khee Koon, albeit in obiter, suggests it will be used going forward. Being the practical embodiment of Lord Morris’ substantial similarity test, it would appear that the debate is somewhat provisionally resolved. However, while resolving one uncertainty, Tan Khee Koon has created another: the court’s method of breaking down offences bypasses the need for offences to be holistically similar. As such, it would be in the interest of the courts to demarcate the boundaries of Tan Khee Koon’s rule to avoid stretching the concept of similarity too far and conclusively decide which test for similarity they prefer.


* LLB (Candidate) (NUS), Class of 2023. All errors and views expressed in this article remain our own.

[1] [1995] 3 SLR(R) 404 [Tan Khee Koon].

[2] [2020] SGHC 21 at para 50.

[3] (Cap 1, 2002 Rev Ed) [IA].

[4] Tan Khee Koon, supra note 1 at para 105.

[5] [1986] 1 MLJ 162 [Jamali]

[6] [1964] AC 1254 [Connelly].

[7] Ibid at 1306.

[8] Ibid at 1340.

[9] [1983–1984] SLR(R) 768 (PC) [Harry Lee].

[10] (Cap 217, 1970 Rev Ed); that provision has since been redesignated as Section 83(2) of the Legal Profession Act (Cap 161, 2009 Rev Ed Sing), where it remains otherwise unchanged.

[11] Harry Lee, supra note 9 at para 2.

[12] Ibid at para 27.

[13] Ibid.

[14] 1 B. & S. 688 [Elrington]; cited in Connelly, supra note 6, at 1202.

[15] Ibid at 696.

[16] [1998] 1 SLR(R) 1.

[17] Ibid at para 8.

[18] Jamali, supra note 5 at 166.

[19] Ibid at 167.

[20] Tan Khee Koon, supra note 1 at para 100.

[21] Ibid at para 122.

[22] Ibid at paras 114-117.

[23] Ibid at para 115.

[24] Ibid at para 116.

[25] Ibid at para 119.